Trustees breathe 'sigh of relief’ as Aon U-turns on WTW acquisition

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The proposed acquisition of Willis Towers Watson by Aon has fallen through after the US Department of Justice challenged the combination in court, potentially saving UK pension trustees the hassle of having to change advisers or actuaries. 
 
US insurance broking giants Aon and Willis Towers Watson are better known in UK pensions as two of the big three consultancy firms dominating the market. The merger, proposed on 9 March last year, would have further concentrated this market following the $5.6bn acquisition of JLT by rival Marsh and McLennan in 2019, better known as Mercer in the UK. 
 
The $30bn Aon and WTW deal has fallen through after the DoJ filed a lawsuit in mid-June, the merger having been cleared by the EU only a few weeks ago. It did not require the UK’s specific approval because large mergers went directly to the European Commission before the end of the Brexit transition period. As part of the terms of the acquisition, Aon will now need to pay a $1bn ‘termination fee’ to WTW.
 

‘We reached an impasse with the DoJ’ 

 
Aon had been in settlement talks with the DoJ to allay the department’s concerns, which said that the deal would create a “broking behemoth and eliminate competition between two of the 'big three' insurance brokers”, but these appear to have broken down. 
 
Aon chief executive Greg Case said: “We reached an impasse with the U.S. Department of Justice,” adding: “The DOJ position overlooks that our complementary businesses operate across broad, competitive areas of the economy. We are confident that the combination would have accelerated our shared ability to innovate on behalf of clients, but the inability to secure an expedited resolution of the litigation brought us to this point." 
 
Willis Towers Watson CEO John Haley said: "Going forward, our focus remains steadfast on our colleagues, our clients and our shareholders. We believe we are well-positioned to compete vigorously across our businesses around the world and will continue to introduce important innovations to the market." 
 
The acquisition of WTW would have made Aon the largest firm in that space. In 2020, Aon reported revenues of more than $11bn, while WTW reported more than $9bn. Aon already has 50,000 employees worldwide, while WTW has 45,000. Although both firms are incorporated in Ireland and headquartered in London, they have their roots in the US and maintain a strong presence there. Both companies are due to report their quarterly results in a few days. 
 

LCP’s German expansion scuppered 

 
In an attempt to reduce competition concerns, the deal would have also seen Aon sell its German retirement business to pensions consultancy LCP, but like the entire deal, this is now also not happening. 
 
Aaron Punwani, chief executive of LCP, said: “Our strategy remains to pursue growth in different markets with long term potential in both our core business of pensions and our growth markets including investments, insurance, energy, health and broader analytics. As such, other than the regret of missing a good strategic opportunity for reasons outside our control, today’s news has no impact on LCP’s business." 
 

What does it mean for pension funds?

 
For UK pension funds, the combination of two big players could have had a number of consequences, the main one being less choice. In some cases, trustees would potentially have had to change advisers or actuary where both firms were employed by the same fund in different capacities, or one by the fund and the other by the employer. 
 
This could have boosted smaller firms such as LCP, Hymans Robertson or Barnett Waddingham, who will now not benefit from clients looking to avoid conflicts of interest. 
 
The proposed Aon/WTW merger had caused unease among the UK pensions industry, with trustees fearing conflicts and less choice. 
 
“There’ll be quite a few trustee boards taking a sigh of relief,” said Michael Clark, managing director of trustee firm CBC Pension Services. “This is something we don’t have to pick up on top of GMP equalisation, checking on the administrators in Covid, making sure cyber security is up to date,” he said.
 
Clark argued that the deal "always looked to me like it was going to fall into regulatory issues” because it was essentially turning the ‘big three’ into ‘the big two’.
 
While he believes it is unlikely that the two firms will start thinking about merging again for the next two years or so given how much work has been undertaken in vain for this transaction, he thinks there will be firms looking to make acquisitions in the UK employee benefits market, with the smallest companies being likely targets. 

This could be another push towards consolidation, he noted. “Smaller consultancies tend to work with smaller schemes. It drives the ‘big is beautiful’ model,” said Clark, but cautioned that bigger size also raises the ‘too big to fail’ issue. 

Bart Heenk, managing director of governance advisory Avida International, said the fact the acquisition is not going ahead was “probably a good thing, certainly for existing clients of them”.  
 
He said it was inevitable in a merger situation that attention moves away from clients. “It’s about adjusting the proposition, that you get out on top in the merger, that your people have most of the benefits and positives,” he said. Even though firms will try to convince clients that mergers do not distract them, he said “that’s not true. I have seen it time and time again.” 
 
The near hit to some pension funds should also serve as a wake-up call that they can’t rely heavily on advisers without a plan B.
 
“You need to think where your vulnerabilities are. Where you have, which some organisations do, complete dependency on one or two main providers that’s not healthy,” Heenk said. 

Although small funds may not be able to change this, larger ones should try to keep competitive attention. “As a large organisation there is so much money lost by lack of competitive attention that it’s worth spending a bit extra to have that reserve,” he said. 
 
While Aon will now not be buying WTW, he does not believe this will be the end of it: “Maybe they’ll be looking at someone else. These processes always lead to something else – it’s very rare that they just turn back."
 

What are your thoughts about the Aon/WTW merger not going ahead? 

 
 
Michael Clark
Bart Heenk
Sally Bridgeland